U.S. v. Devegter

• Decision Date: 29 December 1999
• Docket Number: No. 99-8142,99-8142
• Citation: 198 F.3d 1324
• Parties: (11th Cir. 1999) UNITED STATES OF AMERICA, Plaintiff-Appellant, v. MICHAEL DEVEGTER and RICHARD POIRIER, JR., Defendants-Appellees
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1324

198 F.3d 1324 (11th Cir. 1999)

UNITED STATES OF AMERICA Plaintiff-Appellant, v. MICHAEL DEVEGTER and RICHARD POIRIER, JR. Defendants-Appellees.

No. 99-8142

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

Dec. 29, 1999

Rehearing and Rehearing En Banc Denied March 1, 2000.

Appeal from the United States District Court for the Northern District of Georgia D. C. Docket No. 1:97-CR-508-1

Before BLACK and WILSON, Circuit Judges, and HILL, Senior Circuit Judge.

BLACK, Circuit Judge:

The Government appeals the district court's partial dismissal of the indictment against Appellees, Michael deVegter and Richard Poirier, Jr. The indictment charged Appellees with conspiracy to commit wire fraud, in violation of 18 U.S.C. 371, and wire fraud and honest services fraud, in violation of 18 U.S.C. 1343 & 1346. Appellees moved to dismiss the indictment. The district court granted the motion in part, dismissing the 1346 counts on the ground that the allegations in the indictment were insufficient to charge violations of that section. The Government argues the district court erred in interpreting 1346 and that the allegations were sufficient to sustain the 1346 charges. We agree with the Government that the allegations of the indictment were sufficient to survive the motion to dismiss, and therefore reverse and remand.

I. BACKGROUND

The federal criminal charges in this case arise from alleged corruption in the process by which Fulton County, Georgia, selected an underwriter for the refunding of municipal water and sewer bonds. The following description of the facts is taken from the allegations in the indictment.

In the summer of 1992, Fulton County, acting through its Board of Commissioners, decided to take advantage of favorable interest rates by refunding some of its bonds. This process required an underwriter. For a professional recommendation about whom the county should select as the underwriter, Fulton County obtained the services of Stephens, Inc. (Stephens), an investment banking firm. Appellee deVegter was a vice president at Stephens, and was the financial advisor in charge of the Fulton County relationship.

Appellee Poirier was a partner at Lazard Freres & Co., an investment banking firm that desired to obtain the position of senior managing underwriter. Through an intermediary, Nat Cole, Poirier offered to pay deVegter in return for improper intervention and assistance in Lazard Freres winning the contract. Although deVegter told Cole that deVegter did not control the ultimate decision of the Fulton County Board of Commissioners, deVegter agreed to the offer.

Throughout Stephens' process of crafting its recommendation to Fulton County, deVegter repeatedly manipulated the recommendation in favor of Lazard Freres. While Fulton County's "Request for Proposals" from underwriters was being drafted, deVegter sent advance copies to Poirier and incorporated his comments to make the document more favorable to Lazard Freres. Once proposals were submitted, deVegter sent a copy of a competitor's proposal to Poirier so that he could analyze it and provide deVegter with reasons why Lazard Freres' proposal was superior. Later, after another banker at Stephens had ranked the various proposals, deVegter ordered the banker to adjust the rankings so that Lazard Freres became the first-place proposal. The final recommendation from Stephens to Fulton County accordingly ranked Lazard Freres as the best underwriter; Fulton County adopted this recommendation and awarded Lazard Freres the underwriting contract. At no time did deVegter inform Fulton County of his financial interest in recommending Lazard Freres.

The deal was completed when Poirier, through Cole, paid deVegter $41,936 for his manipulation of the selection process. After the transaction was completed, deVegter and Poirier took steps at their respective firms to cover up the misconduct.

Appellees deVegter and Poirier were indicted for conspiracy and wire fraud, including the honest services fraud theory of 1346. The district court sustained the conspiracy and wire fraud counts of the indictment against Appellees' motion to dismiss. The court granted part of the motion, however, concluding that the allegations of the indictment were insufficient on the 1346 charges. The court held that 1346 can be applied to private sector honest services fraud only when the defendant breached a "clear fiduciary duty." The court found that the indictment failed to allege such a duty and therefore dismissed the 1346 charges.

II. DISCUSSION

This court reviews de novo the dismissal of an indictment. See United States v. Dabbs, 134 F.3d 1071, 1079 (11th Cir. 1998). "Under Fed. R. Crim. P. 12(b) an indictment may be dismissed where there is an infirmity of law in the prosecution; a court may not dismiss an indictment, however, on a determination of facts that should have been developed at trial." United States v. Torkington, 812 F.2d 1347, 1354 (11th Cir. 1987). "[T]his court must reverse a dismissal if it concludes that the factual allegations in the indictment, when viewed in the light most favorable to the government, were sufficient to charge the offense as a matter of law." Id.

The Government appeals the district court's dismissal of the 1346 counts on two grounds. First, the Government argues that the district court erred in its interpretation of private sector honest services fraud under 1346. Second, the Government asserts that the allegations of the indictment relating to the 1346 charges were sufficient to survive the motion to dismiss.

A. Application of 1346 to Private Sector "Honest Services" Fraud.

The federal wire fraud statute prohibits the use of the interstate wires to carry out a fraudulent scheme. The statute provides that "[w]hoever, having devised or intending to devise any scheme or artifice to defraud . . . transmits or causes to be transmitted by means of wire . . . communication in interstate or foreign commerce, . . . for the purpose of executing such scheme or artifice," commits a federal offense. 18 U.S.C. 1343. In addition, "the term `scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." 18 U.S.C. 1346.

The 1346 honest services fraud provision was enacted by Congress in 1988 after the Supreme Court's decision in McNally v. United States, 483 U.S. 350, 107 S. Ct. 2875 (1987). In McNally, the Supreme Court held that the scope of 1343¹ encompassed only schemes to defraud another of money or other property rights, but not schemes to defraud another of intangible rights. See id. at 360. "Congress passed [ 1346] to overrule McNally and reinstate prior law," which had extended wire fraud liability to schemes to defraud another of intangible rights, including an intangible right of honest services. United States v. Lopez-Lukis, 102 F.3d 1164, 1168-69 (11th Cir. 1997). Pre-McNally case law had recognized three kinds of intangible rights the defrauding of which would create wire fraud liability. First, defendants were convicted of defrauding persons of nonmonetary, intangible interests. See McNally, 483 U.S. at 363-64 & n.4 (Stevens, J., dissenting); United States v. Condolon, 600 F.2d 7, 8-9 (4th Cir. 1979) (scheme to defraud women of time, effort, and expectations with seduction scam using bogus talent agency). Second, government officials were convicted for depriving their constituents of honest governmental services. See McNally, 483 U.S. at 362-63 & nn.1-2 (Stevens, J., dissenting); Lopez-Lukis, 102 F.3d at 1168-69 (citing cases). Third, "[i]n the private sector, purchasing agents, brokers, union leaders, and others with clear fiduciary duties to their employers or unions [were] found guilty of defrauding their employers or unions by accepting kickbacks or selling confidential information." McNally, 483 U.S. at 363 & n.3 (Stevens, J., dissenting); United States v. Ballard, 663 F.2d 534 (5th Cir. Unit B Dec. 1981), modified in part on other grounds, 680 F.2d 352 (1982).² Therefore, this Court has noted that although the paradigm case of honest services fraud is the bribery of a public official, 1346 is not limited to such conduct but extends to the defrauding of some private sector duties of loyalty. See Lopez-Lukis, 102 F.3d at 1165 n.1. This case involves the alleged commission of honest services fraud by private sector defendants, not a defrauding of the public of the honest governmental services of a public official.³

The meaning of the "intangible right of honest services" has different implications, however, when applied to public official malfeasance and private sector misconduct. Public officials inherently owe a fiduciary duty to the public to make governmental decisions in the public's best interest. See Lopez- Lukis, 102 F.3d at 1169. "If the official instead secretly makes his decision based on his own personal interests-as when an official accepts a bribe or personally benefits from an undisclosed conflict of interest-the official has defrauded the public of his honest services." Id. When the prosecution can prove the other elements of the wire fraud offense,⁴ taking kickbacks or benefitting from an undisclosed conflict of interest will support the conviction of a public official for depriving his or her constituents of the official's honest services because "[i]n a democracy, citizens elect public officials to act for the common good. When official action is corrupted by secret bribes or kickbacks, the essenceof the political contract is violated." United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996). Illicit personal gain by a government official deprives the public of its intangible right to the honest services of the official.

On the other hand, such a strict duty of loyalty ordinarily is not part of private sector relationships. Most private sector interactions do not involve duties of, or rights to, the "honest services" of either par...